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[MoreMore Insights] Rate Lock

Recently some banks increased their variable and fixed rates, and currently the 2 years fixed rate is as low as 5.49%. So if you are to apply for fixed rate, rate lock is something that you need to understand first.



What is Rate Lock?


Rate lock is an agreement between the borrower and the lender that allows the borrower to lock in the interest rate on the loan at the current market rate for a specified period of time. This is a service introduced by lenders to control the risk of interest rate increases and provide protection for the borrower, but of course this service is not free and the lender will charge a fee. When a borrower locks in the interest rate on a mortgage, it is binding on both parties. Rate lock can be applied to a new home loan application at any time before the loan settles. The rate lock is for the period from the time the loan is offered to the time the loan is settled, and the fixed rate stays the same regardless of how the market changes, as long as the loan application does not change.


Valid Period and Cost of Rate Lock


Different lenders have different policies, and the 60-and 90-day rate lock is normal. Of course, there are also higher fees to be paid for longer lock. Rate lock fees vary according to the loan amount and term of the loan, and are measured in basis points. There are some lenders in the market that are waiving the rate lock fees too.


What Happens if the Rate Lock Expires Before the Settlement?


Real estate transactions don’t always settle on time. If a borrower’s rate lock expires before he gets the key, don’t panic just yet. The lender may offer to extend the term of rate lock, either for free or for a fee. The extension fee may also not be entirely the borrower’s responsibility. Depending on who is responsible for the loan not being completed on time, the lender may also cover some of the costs. If the borrower’s lender is unwilling to extend the rate lock, the borrower’s interest rate and product portfolio will no longer be available. In this case, the lender will lend to the borrower at the current rate. Therefore, the decision to lock rates must consider many aspects. You should try to get the best fixed rate you can earn and lock it quickly before closing on a loan.



The Pros and Cons of Rate Lock


The interest rate changes periodically based on market conditions, and the fine print in the loan application may state that the interest rate can change between the application and the settlement date. In other words, the fixed rate showing on your loan application form or on your loan contract is indicative only, and is not necessarily the final rate that you are going to get on settlement day. The rate lock service could protect the borrower from market fluctuations. The downside to rate lock for borrowers is that the rate lock fees could be quite high. And it could be wasted if the bank doesn't raise the fixed rate after the rate lock fees being paid. And also, assuming borrower’s loan application is declined for some reasons, the lender will not refund the rate lock fee. Meanwhile, rate lock isn’t eligible for switching, splitting, top-ups, loan purpose transfers or repayment changes.


Conclusion


Rate lock can be a useful tool for borrowers who want to avoid the risk of interest rate fluctuations while they are in the process of obtaining a home loan. By locking in an interest rate for a specified period of time, you can better plan and budget for your mortgage payments. However, it's important to consider the costs and limitations of rate lock before deciding if it's the right option for you. As always, it's best to consult with a professional financial advisor or mortgage broker to determine the best course of action for your individual circumstances.

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